Unit roots and trend breaks in the Greek labor market
Abstract
Purpose
The purpose of this paper is to examine the time series behavior of Greek labor market series by providing an empirical perspective on trend breaks and unit roots. Trend breaks represent aggregate behavior responses to “infrequent” changes in economic fundamentals, including changes in fiscal or labor market conditions, as have been perceived in Greece during the last years. Unit roots reveal whether “regular” shocks have significant effects on the level of the series over a specified finite horizon.
Design/methodology/approach
The authors employ recent procedures that deal with the “circular testing problem” between tests on the parameters of the trend function and unit root tests that often arises in empirical applications. These techniques assess trend function stability and are robust regardless of whether the noise component is stationary or having a unit root. Then, conditional on the presence of breaks, the authors test whether the series can be characterized by a stochastic trend.
Findings
The analysis provides evidence of “infrequent” trend breaks that appear to coincide with the recent global economic crisis and the implementation of the counteraction (fiscal) measures to the Greek debt crisis. Allowing for trend breaks does not lead to a rejection of the unit root hypothesis, which might reflect the low flexibility of the country’s labor market operation.
Practical implications
The procedures employed can be viewed as new tools that might help empirical researchers to explore more accurately the characteristics of individual time series and to find reasonable approximations to the true processes of the time series examined.
Originality/value
The paper provides new information on the presence of structural changes in the Greek labor market, and on whether the “aggressive” and “occasional” nature of fiscal measures can be approximated by infrequent changes in the slope of the trend function.
Keywords
Acknowledgements
JEL Classification — C22, E24
The authors would like to thank two anonymous referees for valuable comments and suggestions on this paper. The authors would further like to thank participants at the DIW Macroeconometric Workshop 2013 and the Econometrics seminar of the Department of Economics, University of Konstanz, for helpful comments. The second author gratefully acknowledges financial support by the EU FP7 Marie Curie Zukunftskolleg Incoming Fellowship Program, University of Konstanz (Grant No. 291784). All remaining errors, if any, are of course the authors.
Citation
Venetis, I.A. and Salamaliki, P.K. (2015), "Unit roots and trend breaks in the Greek labor market", Journal of Economic Studies, Vol. 42 No. 4, pp. 641-658. https://doi.org/10.1108/JES-12-2013-0194
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited